Do We Need More Financial Regulations?

Do We Need More Financial Regulations?

 When the Obama Administration argues that more financial regulation is needed to set us on the path to economic recovery, I would like to respectfully submit that the Great Recession could have been avoided, but its cause can be placed primarily on the shoulders  of government, not on greed on the part of investment bankers and business people. The Dodd Frank Financial Reform Act was the worst bill since Hawley met Smoot.

The Securities & Exchange Commission (the “SEC”) specifies which rating agencies qualify for being Nationally Recognized Statistical Rating Organizations or (“NRSRO”). Because the SEC gave such designations to Moody’s, Fitch and Standard and Poor’s, the SEC began assessing the credit quality of mortgage securitizations. However, the rating agencies were “gamed” by the investment bankers, who, if one rating agency said no to a securitization, they would go to another, and find a more receptive rating agency was found. As these agencies were after market share, they did, in large measure, what the investment bankers wanted, and given substantial stock option awards by these agencies, they caved.

Alan Greenspan, then head of the Federal Reserve, often argued that bubbles were impossible to detect and, furthermore, impossible to prevent. Perhaps that is true, but I would argue he should have been able to detect this bubble as the statistics offered clear  evidence.

              Year

               GDP

Total Mortgage Debt

Percentage of Mortgage Debt to GDP

1974

1500

419.3

27.95%

1975

1638.3

459

28.02%

1976

1825.3

517

28.32%

1977

2030.9

603

29.69%

1978

2294.7

708.6

30.88%

1979

2563.3

827

32.25%

1980

2789.5

927

33.21%

1981

3128.4

998

31.91%

1982

3255

1031

31.68%

1983

3536.7

1116

31.56%

1984

3933.2

1243

31.60%

1985

4220.3

1450

34.35%

1986

4462.8

1648

36.93%

1987

4739.5

1828

38.57%

1988

5103.8

2054

40.25%

1989

5484.4

2277

41.52%

1990

5803.1

2506

43.18%

1991

5995.9

2683

44.75%

1992

6337.7

2854

45.03%

1993

6657.4

3013

45.26%

1994

7072.2

3180

44.97%

1995

7397.7

3334

45.07%

1996

7816.9

3599

46.04%

1997

8304.3

3756

45.23%

1998

8747

4058

46.39%

1999

9268.4

4435

47.85%

2000

9817

4821

49.11%

2001

10128

5328

52.60%

2002

10469.6

6036

57.65%

2003

10960.8

9377

85.55%

2004

11685.9

10637

91.02%

2005

12421.9

12070

97.17%

2006

13178.4

13412

101.77%

2007

13807.5

14516

105.13%

2008

14264.6

14661

102.78%

2009

13973.7

14370

102.84%

2010

14498.9

13712

94.57%

2011

15075.7

13384

88.78%

Sep 30, 2012

15811.0

13119

82.97%

In 1974 mortgage debt as a percentage of mortgage debt to GDP was a mere  28%, at its peak it rose to 105.13%. True Dr. Greenspan was no longer at the Fed but much of the explosion in mortgage debt took place under his watch.

Perhaps the most telling statistic is relating mortgage debt to personal income as shown below:

(in billions of dollars)

 

 

 

 

 

 

 

 

 

Year

2000

2004

2005

2006

2007

2008

2009

2010

2011

Mortgage Debt Outstanding

$6789

$10666

$12065

$13458

$14529

$14640

$14673

$14386

$13730

Personal Income

$8559

$9937

$10486

$11268

$12480

$12391

$13974

$14499

$15076

Percentage of Mortgage Debt to Income

79.32%

93.17%

115.06%

119.43%

116.42%

84.64%

95.24%

100.79%

109.80%

In 1982 mortgage debt to personal income was a paltry 33.45% and even between 1980 and 2000 for select years averaged roughly 72%. When mortgage debt to person income rose in 2005 to 115.06% alarm bells should have been ringing loudly within the Fed.

Senator Daniel Patrick Moynihan said it best, “Everyone is entitled to their own opinion but not his or her own facts.”

 The author spent 36 years in commercial banking and last served as General Manager for Depfa Bank. He currently is teaching at NYU’s School of Continuing Education and is the author of “Handbook of Corporate Lending”  and “Case Studies in Corporate Lending,” both published by Amazon.

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